Longevity is defined by the Merriam-Webster dictionary as “a long duration of individual life.” It is also a key financial risk for older adults (i.e., not having enough saved and outliving retirement savings because this money has to last a long time). A recent study found that 63% of pre-retirees feared running out of money more than death vs. 46% of retired respondents.
Below are six take-aways about some recent seminars that I attended about longevity risk:
Ticking Time Bomb- One speaker called longevity risk a “ticking time bomb” in financial planning. Since longevity is a big unknown for most people, nobody knows if longevity risk will affect them personally and, if so, what the (financial) damage will be.
Time Horizon- Most financial experts recommend a savings decumulation plan with at least a 30-year time horizon for people who retire in their mid-60s. It should include essential living expenses, discretionary living expenses, and guaranteed sources of income such as Social Security, an annuity, or a pension.
Couples Always Have a Survivor- Surviving spouses may outlive their partner for a long time (think decades). They must cope with issues such as lower trigger amounts for taxes on Social Security and Medicare and reduced guaranteed income. For example, instead of two Social Security checks, there will be one, along with a reduced (survivor) pension benefit.
Guaranteed Income- Three common sources of guaranteed lifetime income in later life are Social Security, (increasingly rare) defined benefit (DB) pensions, and annuities. People without a DB pension may decide to purchase annuities to create their own “pension.”
Long-Term Care Risk- There is a 70% chance that a person age 65+ will need long-term care (LTC) in later life. Planning strategies to address this risk include purchasing a LTC insurance policy, having adult children pay LTC insurance policy premiums, self-insuring for LTC expenses from invested assets, and moving to a continuing care retirement community (CCRC) where lifetime care is provided in exchange for a hefty entrance fee.
Need for Daily Structure- A longer life means more time to fill and, as one speaker noted, “It’s a long time…you can’t just sit around.” Another stated “you can’t golf and fish every day.” As I noted in my book, Flipping a Switch, older adults need to replace working hours with other activities (e.g., clubs, hobbies, volunteerism) that take up big chunks of time.